Chinese courts tough on trade-marks

Award to New Balance in infringement case may signal China is improving trade-mark enforcement

A CHINESE COURT’S recent award of more than 10 million yuan ($1.88 million) to American multinational sportswear manufacturer New Balance Athletics may signal that it’s becoming worthwhile for Canadian and other foreign companies to take a renewed look at the viability of enforcing their trade-mark rights in China.

Still, intellectual property lawyers aren’t robustly optimistic. “I don’t think the floodgates will burst in respect of damages awards for trade-mark infringement,” says Jamie Rowlands, a partner at Gowling WLG and the firm’s chief representative officer in Guangzhou. “The default position is still low damages for IP cases in China.”

Procedural obstacles have frequently been cited as the primary cause of the low damages awards. Because there is no mandatory discovery or disclosure in Chinese courts, claimants are hard put to establish the extent of the profits earned by the defendant, if any, as a result of the infringement. Otherwise, a reluctance to disclose confidential market-share information has made it difficult for claimants to prove their own losses.

The upshot is that courts frequently have no choice but to award statutory damages. These, however, are limited to maximums of 3 million yuan ($565,000) in IP cases generally and 1 million yuan ($188,200) in patent suits. “Damage awards often do not even reach these caps,” Rowlands says.

Here, New Balance sued for both trade-mark infringement and breach of China’s Anti-Unfair Competition Law. The latter prohibits companies from taking unfair advantage of “decoration unique to well-known products.” New Balance established that the “N” logo found on both sides of its shoes met that designation.

At first instance, the court in Suzhou found that the defendant’s use of the “N” logo confused consumers attempting to ascertain whether products were legitimate New Balance products. The conduct had “drastically damaged” New Balance’s reputation, causing a drop in market share.

On appeal in August 2017, the Suzhou Intermediate People’s court awarded more than 10 million yuan ($1.88 million) in damages and ordered the defendants to stop selling shoes bearing the logo.

Earlier in 2017, New Balance had succeeded in a previous case against copycat shoemakers, but received only $500,000 in damages. What distinguished the instant case was the company’s willingness to file sensitive financial data to prove its losses. As well, the defendant’s behaviour was egregious: it had a history or repeated infringement and refused to comply with previous judgments ordering cessation of its unlawful conduct.

Still, it’s hard to know what to make of the most recent award. “Do you call the result of New Balance’s decision to establish that the counterfeiter had taken away market share a trend, or do you call it a strategic decision by the company to disclose financial information to make up for the fact that no discovery was available?” asks Chris Wilson in Norton Rose Fulbright Canada LLPs Vancouver office. “I’d call it a strategic decision in an individual case.”

From a more holistic perspective, however, there’s little doubt that things have improved in China. “There’s a general trend for more and better enforcement of IP rights, largely because the Chinese market is evolving from being populated by copiers to being populated by innovators,” Wilson says. “It’s not surprising, really. Every country that starts to become an innovator starts to pay more attention to IP rights.”

Which is not to say that rosiness permeates the IP enforcement environment. “We’re still seeing a lot of negative reports alongside the growing number of more positive results,” Wilson says. “The best way to think of the New Balance case is that it is still an anomaly but at the same time a step in the right direction.”

It’s not the only one.

Recently, Chinese authorities passed a regulation that effectively shifts the burden of proof on damages to the defendants. If a claimant makes its best efforts using its own and public sources to establish the profits flowing to the defendant from its infringing conduct, the court can order the defendant to disclose its internal information, failing which the court may rely on the information provided by the claimant.

According to Sheldon Burshtein in Blake, Cassels & Graydon LLPs Toronto office, it’s all part of a 20-year-old continuum. “In the last two decades, China has been slowly strengthening its IP law, coming on line with international treaties, and improving its court systems,” he says. “So if you look at it in five-year increments, things are better now than they were in 2012 but it’s still a bit of a crapshoot.”